Advanced Financial Management (AFM)Question 5828 of 10
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In Interest Rate Parity (IRP), if the spot exchange rate is USD/INR 83.00, the 1-year Indian risk-free rate is 7%\displaystyle 7\%, and the US risk-free rate is 3%\displaystyle 3\%, the theoretical 1-year forward rate (USD/INR) is closest to:

Options

A86.22
B79.90
C83.50
D84.50
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Correct Answer

✅ Option A — 86.22

All Options:

  • A86.22 ✓
  • B79.90
  • C83.50
  • D84.50

Detailed Solution & Explanation

Correct Answer: Option **A** Explanation: Under Interest Rate Parity: F=S×1+rquote1+rbase=83.00×1+0.071+0.03=83.00×1.071.03≈83.00×1.038835=86.22F = S \times \frac{1 + r_{\text{quote}}}{1 + r_{\text{base}}} = 83.00 \times \frac{1 + 0.07}{1 + 0.03} = 83.00 \times \frac{1.07}{1.03} \approx 83.00 \times 1.038835 = 86.22 Since interest rate in India is higher than in the US, the dollar trades at a forward premium against INR.

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